Global: Few economic impacts from Iran conflict outside the GCC

LONDON (Capital Markets in Africa): The latest air strikes in Iran only fan the flames of geopolitical tensions at a global level. While strikes on Iran have happened before, the death of Ayatollah Ali Khamenei and Iran’s attacks on economies in the region have upped the ante and indicated greater economic impacts than the June 2025 US airstrikes on Iran. This is particularly true for countries in the Gulf Cooperation Council (GCC), where the strikes pose a considerable risk to their tourism industries.

What happens next is highly uncertain and fluid – our colleagues at Alpine Macro have provided some in-depth analysis. For now, we assume that the conflict may last as little as a week or two, but possibly as long as two months. However, it’s plausible that disruptions to gas and oil supplies in the Persian Gulf will take place and their impact on gas and energy prices could prove more drawn out.

Iran can’t win this conflict and the key uncertainty beyond the duration of hostilities and disruption is who’ll be in power when a truce is reached and, as a result, how durable any deal would be. There’s a range of plausible outcomes but an extended period of competing factions fighting for power can’t be ruled out.

We now think that the two-month disruption scenario, which pushes the average oil price to just below $80 per barrel in Q2, highlighted in a recent Research Briefing, seems the most plausible assumption for how developments play out.

Latest strikes are a game changer for the GCC
The economic costs for GCC countries will be significant despite what happens next. The vast majority of GCC oil and gas exports pass through the Strait of Hormuz. Any disruption will immediately and negatively affect the majority of GCC export revenue and most of its trade flows to Asia and Europe. Reports already suggest that the cost of insuring vessels passing through the Strait of Hormuz have risen by 50%, and further increases are possible; this has effectively slowed traffic passing through the Strait to a trickle. Iran has targeted port infrastructure, which could potentially prolong disruptions to shipping flows.

However, the hit to the economy will spread far beyond the direct impacts associated with the disrupted shipping of oil and gas. Indeed, previous conflicts in the region have weighed heavily on real GDP growth as major US military actions in the Middle East have caused regional financial market conditions to tighten and tourism flows to decline.

The hit to tourism will be felt immediately via tourists avoiding the region, air travel disruptions as flights are cancelled, and a hit to sentiment. Geopolitical instability will significantly reduce sentiment among potential visitors that might have considered travelling to the region, probably well beyond when fighting in the region ends. The bombing of tourist areas such as Dubai will linger in the memory of many potential travellers.

A reduction in tourism flows in the region will pack a bigger economic blow than in the past because its share of GDP has been climbing, along with employment in the industry. Data from the World Travel and Tourism Council estimate that in 2024, tourism and travel accounted for 10% of GDP in the Middle East, behind only the Caribbean, Oceania, and the EU. Our colleagues in Tourism Economics quantified the drag on tourism from last year’s US attacks on Iran, but what occurred over the weekend will have a greater hindrance because of Iran’s attacks on Qatar, United Arab Emirates, and Bahrain – all large tourists destinations in the region.

The immediate implications for the GCC will garner the most attention, but the long-term effects depend on what occurs with the political regime in Iran, as that will factor into how international businesses perceive the viability of GCC countries, including the United Arab Emirates. This will affect inward migration, particularly among expats, which have accounted for more than half of the increase in GCC population over the past several years and would disproportionately hurt Qatar and United Arab Emirates.

We’ll return to the likely scale of the economic impacts for the GCC region in a forthcoming regional Research Briefing, and flesh out more detailed assessments of the impacts in the next batch of global economic forecasts to be published on March 10.

Weathering a temporary jump in oil prices
Regardless of the exact scale of the economic hit to the GCC, the region accounts for less than 2% of global output. For the shock to have a significant impact on the world economy, there will need to be notable economic spillovers. Typically, the ripple effects of geopolitical events dissipate quickly the further you move from the epicentre of the shock. The main transmission channel for most of the world will be the impact from higher energy prices and any associated financial market weakness.

Following the events of the weekend, we expect the average price of oil to push up to just below $80 in Q2, this would involve it spiking higher and then gradually falling back. This profile could be consistent with a sharp spike and a rapid fall in a scenario where the situation either de-escalates quickly or over a longer period but with less intense tensions. By Q3, we expect the oil price to fall back to around $65, lower than the current spot rate but about $6 higher than in our February baseline, before converging back to the February baseline over the following year.

The impact on gas prices is likely to be larger because the gas market is tighter than the oil market, making it more sensitive to supply shocks. Qatar, which produces about 20% of the world’s liquefied natural gas and doesn’t have an alternative route to the Strait of Hormuz, has reportedly undertaken a precautionary halt in production in response to events in the Middle East. In our simulation, European gas prices will be around 60% higher on average in Q2 than we assumed in our February forecasts, before gradually falling back towards the path in our February forecasts.

The key point of the scenario is that the temporary nature of the energy shock limits the drag on the global economy. In addition, the world economy benefits from the decline in oil intensity over time – some estimates suggest oil consumed per unit of economic output has fallen by about 80% since 1980. This has lessened the adverse hit to the real economy and inflation from oil price spikes. The impact on oil price inflation is typically greater in advanced economies than emerging markets, where subsidies and price controls reduce the price impacts.

The largest increases in consumer prices generally occur in Europe. In our scenario, Eurozone CPI inflation is boosted by around 0.4pps in 2026. As a result, inflation averages 2.5% over the year, rather than gradually converging to target. But in 2027, the shock pushes headline inflation below 2% as oil and gas prices fall back to the baseline profile.

The peak impact on US CPI occurs in the second quarter, adding 0.5ppts to the annual rate. This quickly fades in the second half of the year. Though core CPI excludes food and energy, higher transportation costs will put upward pressure on it, but only modestly.

The limited inflation effects of the oil price shock ensure that the hit to real disposable income and, by extension, consumer spending is small. According to our simulations, world GDP growth would be just 0.1pp lower in 2026. To put this in context, the downward revision of world GDP growth to 2.9% still leaves it above our forecast of 2.8% at the beginning of this year and comfortably within the broad growth range of the past three or four years.

We don’t anticipate a significant offset on the US economy to come from increased oil production in response to higher prices. US domestic energy production is mainly captured in GDP via non-residential fixed investment in mining exploration, shafts, and wells. Though oil prices will jump above the break-even price, it’ll be temporary as it normally takes three to six months to adjust drilling plans; therefore, the temporary increase in prices is unlikely to materially move the needle. US GDP growth in 2026 is expected to barely change.

This may understate the drag on the economy if the events in the Middle East prompt financial market conditions to tighten. The US economy has become increasingly sensitive to fluctuations in asset prices as the wealth effect has been a key support to consumer spending. Nonetheless, the broad overall reaction of financial markets to date, beyond those sectors at the centre of the shock, has been reasonably subdued. This suggests that it’s too early to price in significant financial market-driven weakness in the real economy.

The impacts on Europe are slightly larger due to the marginally higher inflationary impact and knock-on effects of a sudden rise in energy prices in places such as Germany, where there’s a greater dependence on energy-intensive industries, including chemicals, autos, and machinery. Nonetheless, the importance of energy intensive sectors has declined in recent years as a result of the gas price spike due to the Russia-Ukraine war. Even so, the increase in energy prices only points to a 0.1ppt hit to Eurozone GDP growth in 2026. The impacts on Europe may be lessened because the gas price spike comes at the end of the intense heating season – this timing gives Europe some scope to delay refilling gas storage before next winter.

In general, our modelling suggests that key economies in the Asia-Pacific region like China, Japan, South Korea, and Australia are less adversely affected by the shock than Europe is. Overall, the situation in the Middle East doesn’t materially alter the ranking of how economies perform this year.

Central banks will preach patience
Central banks generally look through sudden increases in energy prices as they’re historically temporary and don’t cause a sustained increase in long-run inflation expectations. Given this and the limited scale of the rise in inflation, the shock doesn’t justify a material change to the forecasts for monetary policy in the US, the Eurozone, and Japan.

In some instances, particularly the Federal Reserve, it could add support for easing into the energy price shock if the demand destruction is seen as a greater threat than inflation. The Fed will watch if the labour market weakens in response, though it’s unlikely, or if core inflation decelerates because of demand destruction more than offsetting the pass-through from higher input costs. The Fed, along with the European Central Bank, the Bank of Japan, and the Bank of England, will likely opt to be patient and double down on its data-dependence mantra.

Iran attacks add to the risk
In isolation, the US-Israeli attack on Iran doesn’t have a significant impact on the global economy. But there’s a growing risk that shocks begin to pile on top of one another, amplifying the hit. For instance, any disruption in the Strait of Hormuz could be magnified by renewed Houthi attacks in the Red Sea, or an underestimation of Iran’s ability to cause a sustained disruption in the Strait could intensify the effects. The duration of the conflict and the nature of any regime change remain impossible to pin down at this point but will have a crucial bearing on the future stability of the Middle East and the path for energy prices.

These military actions in the Middle East are happening while there’s already changes in US tariffs that have increased trade policy uncertainty and financial markets are jittery about AI. Multiple shocks tend to expose other fragilities and that could include questions about the true health of China’s economy or, in case of the US, private credit fanning a liquidity issue. For that reason, we’ll continue to take a close look at this evolving situation.

Contact author: Ryan Sweet, Chief Global Economist – rsweet@oxfordeconomics.com